Core Insights - The banking sector in China is facing a critical situation as the net interest margin (NIM) has fallen to 1.43%, below the non-performing loan (NPL) ratio of 1.51%, indicating a potential challenge in covering operational, credit, and capital costs [2][3] - The average NIM for Chinese banks has dropped below the regulatory warning line of 1.8%, with the current figure at 1.74% as of Q1 2023, marking a significant decline [2][3] - Despite the declining NIM, banks are still generating reasonable profits compared to other sectors, primarily through asset growth, which increased by 7.2% year-on-year in Q1 2023, although this is a slowdown from the previous year's 11.7% growth [3][4] Financial Performance - The projected net profit for commercial banks in 2024 is 23,235 billion yuan, a decrease of 540 billion yuan or 2.27% from 2023, which had a profit growth rate of 3.23% [3][4] - The average price-to-book (P/B) ratio for A-share listed banks is currently at 0.58, indicating limited capacity for external capital replenishment through common stock issuance [4][5] - Investment income for many banks has seen significant growth, with 37 out of 42 listed banks reporting positive investment income growth, and five small banks achieving over 100% year-on-year growth [5][6] Strategic Adjustments - In response to the narrowing NIM, banks are adjusting their business strategies by increasing fees for various services, such as credit services and ATM withdrawals [4][5] - The bond market has been favorable, with banks increasing their bond investments, leading to substantial investment income growth; for instance,招商银行 reported a 34.74% increase in investment income for 2024 [4][5] - The revitalization of the capital market is crucial for small banks to raise capital through listings, which would also enhance their intermediary business income [5][6]

Core Viewpoint - The issuance market for secondary capital bonds and perpetual bonds (commonly referred to as "perpetual bonds") by commercial banks has shown a significant recovery in the second quarter compared to the first quarter, although the overall issuance volume and quantity have decreased year-on-year [1][2]. Summary by Relevant Sections Issuance Trends - As of June 3, 2023, a total of 34 perpetual bonds have been issued by commercial banks this year, amounting to 642.16 billion yuan, which represents a year-on-year decrease in both quantity and scale [2]. - In the second quarter, 25 perpetual bonds were issued, with a total issuance scale of 468.3 billion yuan, showing a significant increase from the first quarter [1][2]. Demand Differentiation - There is a noticeable differentiation in demand for perpetual bonds among different types of banks. State-owned large banks have reduced their reliance on perpetual bonds for capital supplementation, leading to a decline in issuance scale [1][3]. - In contrast, small and medium-sized banks are increasing their issuance of perpetual bonds due to lower financing costs, indicating a greater demand for capital supplementation [3]. Capital Adequacy Concerns - The capital adequacy ratios of small and medium-sized banks, such as city commercial banks and rural commercial banks, are under significant pressure, which is reflected in their increased issuance of perpetual bonds [3]. - Data from the National Financial Regulatory Administration shows that the capital adequacy ratios for city commercial banks, private banks, and rural commercial banks are lower compared to state-owned large banks and national joint-stock banks [3]. Regulatory Environment - Since 2025, the approved issuance quota for perpetual bonds has approached one trillion yuan, showing a significant increase compared to the previous year, with many approvals granted to small and medium-sized banks [4]. - The issuance structure is expected to diversify, with state-owned large banks likely to reduce their issuance scale, while national joint-stock banks and city commercial banks may see marginal increases [4].

1. Report Industry Investment Rating The provided content does not mention the report industry investment rating. 2. Core Viewpoints of the Report - For investment - grade bonds, understand various spreads in terms of liquidity premium, and in a bond bull market, seize the opportunity to intervene when negative events cause the variety premium to rise. For high - yield bonds, the proportion of credit risk premium factors increases, and low - quality varieties should focus on the macro - credit environment and local credit environment. - When comparing AAA - and AA+ rated commercial bank secondary capital bonds and perpetual bonds, it is recommended to give priority to perpetual bonds due to their higher yields and better liquidity. For AA - rated bonds, when the spread between the two is high, consider intervening in perpetual bonds [103][105]. 3. Summary According to the Table of Contents 3.1 Commercial Bank Secondary Capital Bonds and Perpetual Bonds: Basic Introduction - **Definition of Secondary Capital Bonds**: Issued by commercial banks, with the repayment order of principal and interest payment after depositors and general creditors, and before equity capital, other Tier - 1 capital instruments, and hybrid capital bonds, following relevant regulations [4]. - **Important Terms**: Include subordination clause, write - down clause, and call option. The call option can be exercised at least 5 years after issuance, subject to regulatory approval and prior notice [5][7]. - **Main Features**: The amount that can be included in Tier - 2 capital decreases year - by - year in the last five years before maturity. The common term is N + 5, with 5 + 5 being the most common (86%). Since 2018, 40.8 billion yuan of secondary capital bonds have not been redeemed, accounting for 1.8% of callable bonds [9]. 3.2 Basic Overview of China's Commercial Bank Secondary Capital Bonds - **Issuance Volume and Maturity Distribution**: From 2013 to 2024, a total of 6.27 trillion yuan of commercial bank secondary capital bonds were issued, with an average annual issuance of 522.5 billion yuan. The average annual net financing in the past five years was 411 billion yuan. The maturities are concentrated in 5 + 5 (84%) and 10 + 5 (14%) [11]. - **Issuer Distribution**: By type, large commercial banks account for 58% of the issuance, followed by joint - stock banks (22%), city commercial banks (15%), rural commercial banks (4.9%), foreign - funded banks (0.2%), and private banks (0.1%). The top 20 issuers account for 82.9% of the issuance, the top 10 account for 71.3%, and the top 4 account for 49.4%. Industrial and Commercial Bank of China has the largest issuance (14.3%), followed by Bank of China (12.7%) [17]. - **Rating Distribution**: In terms of issuer ratings, AAA - rated issuances account for 93.7%, AA+ for 3.9%, AA for 1.3%, AA - for 0.7%, and others for 0.5%. In terms of bond ratings, AAA - rated issuances account for 82.4%, AA+ for 8.5%, AA for 5.3%, AA - for 2.2%, and others for 1.6%. 10% of issuers have the same bond rating and issuer rating, while for others, the bond rating is lower than the issuer rating [24]. - **Trading Volume**: The liquidity of commercial bank secondary capital bonds is increasing. In 2024, the annual trading volume was 8.028 trillion yuan, and the turnover rate was as high as 198%. The top 20 issuers in trading volume accounted for 89.1%, the top 10 accounted for 75.9%, and the top 4 accounted for 52.3% [25]. - **Latest Stock Situation**: As of the end of April 2025, there were 508 secondary capital bonds in the market, with a balance of 4.2448 trillion yuan and an average scale of 8.4 billion yuan. There were 249 issuers, among which large commercial banks accounted for 58%, joint - stock banks 23%, city commercial banks 14%, and rural commercial banks 5%. The average term was 3.04 years, with 16.7% having a term of 2 - 3 years and 16.7% having a term of 1 - 2 years [28]. - **Investors**: Commercial banks, commercial bank wealth management products, and other non - legal person products are the main investors. At the end of 2020, according to China Central Depository & Clearing Co., Ltd., commercial banks accounted for 30.6%, commercial bank wealth management products 26.3%, other non - legal person products 34.5%, insurance institutions 4.7%, policy banks 2.4%, and overseas institutions 0.8%. As of the first quarter of 2025, public funds held 200.1 billion yuan of commercial bank secondary capital bonds (with an average term of 2.45 years), and the credit quality of the issuers held by public funds was weaker than the market average [39][40]. 3.3 Basic Overview of China's Commercial Bank Perpetual Bonds - **Issuance Volume and Stock Distribution**: Since 2019, a total of 3.22 trillion yuan of commercial bank perpetual bonds have been issued, with an average annual issuance of 510 billion yuan. The term is 5 + N. As of April 30, 2025, there were 240 commercial bank perpetual bonds in the market, with a balance of 2.4605 trillion yuan [43]. - **Issuer Distribution**: Compared with secondary capital bonds, the issuers of perpetual bonds are more concentrated in companies with better credit quality, and the number of rural commercial bank issuers has significantly decreased. The top 20 issuers account for 88.8% of the issuance, the top 10 account for 71.5%, and the top 5 account for 51.9%. Agricultural Bank of China has the largest issuance (16.8%), followed by Bank of China (10.3%) [48]. - **Rating Distribution**: In terms of issuer ratings, AAA - rated issuances account for 96.3%, AA+ for 3.1%, and AA for 0.6%. In terms of bond ratings, AAA - rated issuances account for 88.9%, AA+ for 6.9%, AA for 3.5%, AA - for 0.6%, and A+ for 0.1%. 35% of issuers have the same bond rating and issuer rating, while for others, the bond rating is lower than the issuer rating [58]. - **Trading Volume**: The liquidity of commercial bank perpetual bonds is good, and the turnover rate is increasing. In 2024, the annual trading volume was 6.298 trillion yuan, and the turnover rate was as high as 253%. The top 20 issuers in trading volume accounted for 86.9%, the top 10 accounted for 69%, and the top 5 accounted for 44.5% [59]. - **Issuers' Implied Ratings in the ChinaBond Market**: In the latest ChinaBond market implied rating distribution, there are 6 AAA - issuers (2.4%), 15 AA+ issuers (6.0%), and 32 AA issuers (12.9%). Among the AA+ issuers in the ChinaBond implied rating, there are 9 joint - stock commercial banks, 5 city commercial banks, and 1 rural commercial bank [64]. 3.4 Yield Fluctuation Rules of Commercial Bank Secondary Capital Bonds and Perpetual Bonds - **Commercial Bank Secondary Capital Bonds**: The yield of commercial bank secondary capital bonds fluctuates cyclically, similar to the national debt cycle. As of April 30, 2025, the average yields to maturity of 5 - year AAA -, AA+, and AA commercial bank secondary capital bonds were 3.44%, 3.54%, and 3.85% respectively, and the lowest yields appeared on January 3, 2025. The spreads between different ratings also fluctuate cyclically [72]. - **Commercial Bank Secondary Capital Bonds vs. Commercial Bank Ordinary Bonds**: From 2019 to the present, the average spreads of 5 - year AAA -, AA+, and AA bonds were 37BP, 42BP, and 63BP respectively, and the current spreads are at historical lows. The spread trend is positively correlated with that of commercial bank ordinary bonds. Events such as the write - down of Baoshang Bank's secondary capital bonds and changes in valuation methods have affected the spread [73][78]. - **Commercial Bank Secondary Capital Bonds vs. Non - financial Corporate Credit Bonds**: The yield trends of secondary capital bonds, medium - term notes, and urban investment bonds are very similar, and the absolute levels of yields are also relatively close. Currently, the yields of various grades of commercial bank secondary capital bonds are slightly lower than those of medium - term notes [82]. - **Commercial Bank Perpetual Bonds vs. Secondary Capital Bonds**: Since August 2021, the average spreads between perpetual bonds and secondary capital bonds for AAA - have been 12BP, AA+ 11BP, AA 24BP, and AA - 48BP. The spreads between AAA - and AA+ are relatively stable, while those between AA and AA - fluctuate greatly [89]. 3.5 Investment Outlook - **Differentiate between Investment - grade and High - yield Bonds**: For investment - grade bonds, understand spreads based on liquidity premium and seize opportunities in a bond bull market. For high - yield bonds, focus on credit risk premium. - **Comparison between Commercial Bank Secondary Capital Bonds and Perpetual Bonds**: For AAA - and AA+ bonds, prefer perpetual bonds. For AA - rated bonds, consider perpetual bonds when the spread is high [103][105].